Wednesday, 4 May 2016

RBA & Budget flip the bird at Four Corners (dogbox ahoy!)

Construction boom

Commentators, including myself, have at times seemed a little unsure how to report the residential construction boom that's underway. Within the space of about a year, many of the same people who have complained for years about Australia not building enough housing now argue that we are building too much, and too many attached dwellings in particular.

A Four Corners documentary in the past week loaded to the absolute max with emotive, value-laden terminology underscored this very point, with Ken Morrison of the Property Council observing that a "chronic undersupply of housing" has been responsible for pushing up prices.

But rather contradictorily the presenter noted "an incredible" 13,000 apartments per annum being constructed in Melbourne over the last two years, with Melbourne being a city which is building "a hell of a lot" in a market that is "already saturated".

How much is too much?

I started warning about pockets of apartment oversupply on this blog and on Property Observer well before such concerns became commonplace way back in 2013. Yet to date, there have been relatively few adverse outcomes (I get this kind of stuff wrong regularly, how hard is that for people to say these days, by the way?).

So are we building too much or too little? Or is it just too much of the wrong stuff?

Back to Four Corners, old-timer and former pollie Jeffrey Kennett AC rather unhelpfully inferred that those who choose to live in attached dwellings are borderline sub-human, or living like canines (some people under the age of 70 actually choose to live that way these days, Jeff!).

Another segment filmed with slightly ridiculous spooky Scooby Doo or haunted house style background music showed a single bloke living in a 40 square metre apartment in chic Potts Point ("like, shee-yut Scoob, the fairground owner's a ghost!"). It was pretty scary stuff, to be fair, imagine how many takeaways the guy must get.

It was further implied disapprovingly that apartment rents are too low, which overall I'd have thought was a positive - at least for renters, if not for landlords. Cut to a helicopter scene gliding over Australia's most expensive suburbs, which were duly confirmed as being very expensive.

Impending gloom

To nobody's particular surprise, and a recurring theme of a few years now, ABC spent the bulk of the documentary discussing among other things "a crash", "a coming crunch", "a collapse in the property market [that] cannot come soon enough", and noting that when "the bubble bursts" it "will all come crashing down". Amidst a heap of other stuff.

The usual Cluedo suspects were wheeled out, ominously noting (cue more eerily sinister music) that "predictions of a crash" are "beginning to emerge". Including of course from Professor Keen, who unless I'm missing something (?) has been 'emerging' from the University Billiard Room with the lead piping for at least a decade now. Keeno must be exhausted, he seems to be doing more TV appearances than Eddie McGuire these days.

Admittedly, I didn't really catch that part of the doco as I was busy making a mug of English Breakfast, no sugar, but presumably there were the usual laments about an impending property crash (just a year away...), and "wankers" that are "propping up a Ponzi scheme", or similar vitriolic punditry.

When the emotive language is stripped out, basically people have just kept buying houses with the cost of money being so cheap.

A shocked Four Corners claimed that Australians were spending "ten, twenty, even THIRTY times their annual income on a house", though unfortunately no actual data source was quoted for this eye-popping, if almost comically inaccurate statistic. Former tennis pro turned pollie John Alexander OAM then warned that speculative "investors are borrowing at 100 per cent" (no data source quoted here either).

Then there was a segment comparing a median salary income with the median price of a detached house in Strathfield ($2.2 million), though to the best of my knowledge houses in the golden mile or millionaire's row are generally bought by...well, millionaires. Or at least people with a lot of equity.

First-time buyer "blown out the water" by...family

What could have been potentially quite an enlightening documentary was dampened a bit by the somewhat excessive focus on a 25 year-old first time buyer with a $150,000 deposit and a budget of $559,000, who it was claimed had been, quote, "blown out of the water" at 22 successive auctions (really?).

I guess the underlying premise was to film an auction to show the buyer being, quote a second time, "blown out of the water" by Baby Boomer investors, the meme being a little undermined when the family home on a massive 1,000 square metre block was actually sold to, erm, a young family.

"You predicted this...you lost out to people with an agenda!" jibed the presenter to the first time buyer - slightly absurd given that the so-termed 'agenda' was actually their purchase of a spacious family home. Doubtless the crew were disappointed at the mistimed scoop, and fair enough. The young family buying the house on such an enormous block of suburban land incidentally planned to add to the dwelling stock through a subdivision.

Herein lie a just a few of the endless paradoxes of our housing markets - some people whinge when we build, and others complain when we don't. They grumble that we build McMansions to the very perimeter of blocks of dirt, or whine when we build apartments, or sometimes even townhouses. They carp when prices go up (or down). And they cavil when incentives for first homebuyers are introduced (or are removed). And so on.

What can one say? It's a market with a great many moving parts.

Then there was yet another segment featuring an apparently anonymous chap looking to buy an enormous family home in suburban Melbourne, who was also - yet again!! - quote, "blown out of the water" (so much blowing!) by another bidder. I couldn't quite grasp the point of this scene, but evidently nobody just misses out on auctions in Victoria, they can only be brutally detonated skyward from the deep blue H2O.

Anyhoo, John Daley (not the errant golfer, another guy) of the Grattan Institute was the contributor who cut to the heart of the challenges facing new housing developments, noting that new dwelling stock tends to offer inner city apartments, or houses on the city fringe - often located at an unsocial distance from jobs, facilities, hospitals, and schools - but not a great deal in between. Bingo!

Record construction

Despite Australia's biggest construction boom on record, Melbourne's reported vacancy rate has tumbled to its lowest level since 2010 (refer here for analysis), while the inner Sydney vacancy rate has sunk as low as just 1.3 per cent (see here).

There are a number of possible drivers for this, not least the very strong level of population growth in Melbourne and Sydney. Over the 11 years to 30 June 2015, the population of Greater Melbourne increased by 887,545 to 4,529,496, with the pace of population growth accelerating to 91,600 per annum in FY2015, which perhaps puts those 13,000 new apartments per annum into a different kind of perspective.

A very significant sub-trend is the massive projected surge of international students into the largest capital cities.

Perhaps even more noteworthily, with over half of the new dwelling stock effectively being financed by offshore investors, particularly from China, there is a strong suspicion that many of the new dwellings lie vacant and may never make it to the open rental market. This point has been regularly highlighted by Prosper Australia, and quite accurately, I increasingly believe.

According to the ABS, after accounting for demolitions Australia increased its residential housing stock by 162,700 or 1.7 per cent in 2015 to 9,615,800 dwellings. In a huge year, that figure could theoretically rise to 2 per cent of the existing dwelling stock, but probably not a lot further before the industry hits capacity and labour and materials costs skyrocket.

RBA flips the bird

In reality, property markets and sub-markets are quite complex beasts which continually defy soundbites and over-simplistic reporting, with some markets performing strongly (recently, parts of Sydney, most notably), and others dismally (mining towns).

Some inner city areas are indeed becoming flooded with high rise apartments - or "dogboxes" as Kennett would say - and there is indeed plenty of housing construction presently underway on the outer city fringes. Realistically landlocked middle-ring suburbs of the large capital cities will always be harder to supply with new family-appropriate dwelling stock, as is the way of these things.

Predictably Four Corners went down the well-trodden path of predicting impending doom for property markets, yet the news yesterday suggested that there will more likely be a resurgence of homebuyer demand over the next year or two.

First, thanks to remarkably soft inflation the Reserve Bank cut the official cash rate to the lowest level in history at 1.75 per cent - not a move likely to be associated with fading demand for real estate - and three of the four major banks passed on the rate cut in full to borrowers. A number of analysts now believe that having gone once the RBA will cut again this year, at least once more to 1.50 per cent, and perhaps to as low as 1.25 per cent.

Then Treasurer Scott Morrison announced in the Federal Budget that there would be a crackdown on superannuation concessions.

If anything these combined measures will stimulate activity in the property markets, and not only for investors - especially given the crackdown on the taxation treatment of super and the continued underwhelming performance of equity markets (ANZ cut its dividend yesterday, and the share prices of both BHP and Rio Tinto crashed today).

One potential curve ball, of course, could be if the Coalition mob somehow contrives to lose the election to the other mob, so watch this space...

Build baby, build!

Another +3.7 per cent seasonally adjusted rebound was reported for ABS Building Approvals in March 2016, driven mainly by a +6.7 jump in attached dwelling approvals to 9,395, as well as a +2.6 per cent rebound in detached house approvals to 9,771.

House approvals (-0.2 per cent) and particularly attached approvals (-11.5 per cent) are now both lower than one year ago, yet for now remain at a historically elevated level, with the trend line for total approvals just shaping up again very slightly.

In rolling annual terms, however, building approvals are now steadily coming back down to earth, ticking down from a record of just under 240,000 to about 232,000. In terms of what this means for the housing market, we'll probably see something like 200,000 commencements over the next year, down from a record peak of around 220,000 in 2015.

The last three years have been characterised by an unprecedented explosion in "high-rise" blocks of flats of four or more storeys, with just over 70,000 such approvals over the past year. In the year to March 2016 we saw an incredible 57 times as many approvals of this property type as was seen in 1992. Kennett must be borderline apopleptic!

Curiously, as previously noted, apartment vacancy rates have not really risen that much, and in Sydney and Melbourne they have even been declining. However, the high-rise sector of the market is clearly set to underperform other property types, for my money.

City by city

It's important to note that in geographically constrained Sydney's case the higher number of attached dwelling approvals has to some extent come at the expense of detached housing. There is plenty of space to build on Sydney's fringe, but shovel-ready greenfield sites generally tend to be located a long way from the city. Melbourne has been able to spread further and thus continues to approve by far the highest number of houses.

March was quite a big month for attached dwelling approvals in original terms, with Greater Sydney (3,043), Melbourne (2,238) and Brisbane (1,643) respectively all recording solid numbers. However, when looked at in rolling annual terms it does seem that the peak of the approvals boom has now passed for the most populous capital cities.

The sheer scale of the high-rise apartment boom is reasonably well depicted by the chart below, but even here the trend now seems to be down.

It's also important to remember that approvals do not equal commencements, and Sydney in particular has an all-time record number of dwelling approvals waved through but not yet commenced. Putting this little lot all together, following around 220,000 commencements in 2015, we can expect to see about 200,000 or so in 2016.

The wrap

Overall this was an upbeat result for building approvals, but one which was overshadowed by yesterday's interest rate cut. It will be very interesting to see how housing finance responds to a record low cash rate. No space left to go into any more detail on looming apartment oversupply unfortunately, but here are a few pointers in Brisbane. Dogbox ahoy!